H2A

Office of the President

TO MEMBERS OF THE HEALTH SERVICES COMMITTEE:

ACTION ITEM – CONSENT

For Meeting of June 23, 2021

APPROVAL FOR PARTICIPATION IN A CANCER CARE JOINT VENTURE WITH A BAY AREA HEALTH SYSTEM, CAMPUS

EXECUTIVE SUMMARY

UCSF Health (UCSFH) is requesting up to $40 million of capital funding to participate in a joint venture with John Muir Health (JMH) in order to build a comprehensive outpatient cancer facility—the UCSF-John Muir Health Cancer Center Walnut Creek.

UCSFH and JMH established an affiliation in 2019 to create a cancer network in the by entering into management services and related contracts with each other and BayHealth, LLC. The first of two projected cancer centers opened in 2020 in Berkeley with BayHealth as the joint operating company. The joint venture in Walnut Creek will be the second.

John Muir Health has begun construction of the 124,000-square-foot comprehensive cancer center on JMH’s Walnut Creek campus that will open in 2024 and will include an outpatient clinic, infusion services, specialty services (e.g. breast surgery, hematology/, ENT), radiation therapy, outpatient surgery, clinical research, genetic counseling, and cancer support services.

Contra Costa County is an important market for UCSFH cancer services because patients from this region make up UCSFH’s second largest patient base and source of revenue outside San Francisco. It is a large and growing market. New cancer case volume in central Contra Costa County is expected to grow 19 percent over the next ten years, one of the fastest rates in the region.

The projected UCSFH investment will cover the construction of the center, the purchase of furniture and equipment, including three linear accelerators and imaging equipment (PET/CT and MRI), and the IT investment. Funds will come from UCSFH System reserves and are allocated in the Health System’s ten-year strategic plan.

HEALTH SERVICES COMMITTEE -2- H2A June 23, 2021

RECOMMENDATION

The President of the University recommends that the Health Services Committee recommend to the Regents:

A. Approval of UCSF Health’s (UCSFH) establishment, with John Muir Health (JMH), of a joint venture (Walnut Creek Cancer Program, LLC, the Joint Venture) dedicated to operating an outpatient comprehensive cancer center in Walnut Creek, California (the Cancer Center), with UCSFH and JMH as its two corporate members, in furtherance of the charitable and educational purposes of UCSFH and JMH, including promoting health and providing or expanding access to healthcare services for a broad cross-section of the community. The investment of up to $40 million shall be an exchange for up to a 49 percent stake in the Joint Venture.

B. That the following be required, in connection with the above arrangements:

(1) Purposes/Mission: UCSFH’s participation in the Joint Venture shall be in furtherance of its non-profit purposes and consistent with its clinical and academic missions.

(2) Capital Calls/Additional Investment: Concurrence of the Chair of the Health Services Committee shall be required for any investment (e.g., in response to a capital call) beyond the above amounts, as well as any mergers, acquisitions, joint ventures, or sales of all or substantially all of the assets of the Joint Venture.

(3) Exclusivity: Nothing in any agreement signed in connection with the Joint Venture will bind the University as a whole, UC Health, or any UC campus or UC medical center (other than UCSF); and all definitive agreements shall preserve UCSF Health’s right at all times to participate directly or through the new companies where appropriate in systemwide initiatives notwithstanding any exclusivity agreements or policies otherwise adopted by the Joint Venture.

(4) Use of University Name: UCSFH shall participate in a joint marketing arrangement for the Cancer Center, consistent with the requirements of California Education Code Section 92000. Any use of the UCSF or University of California name shall be subject to prior approval by the campus and shall be consistent with University policies governing use of the University’s names and marks and appropriate licensing agreements.

(5) Access to Records: UCSF Health shall have access to all legal and financial records maintained by the Joint Venture.

(6) Termination: The definitive agreements shall include appropriate provisions for termination or dissolution.

HEALTH SERVICES COMMITTEE -3- H2A June 23, 2021

C. That the President or his designee be authorized, after consultation with the Office of the General Counsel, to approve and execute any agreements reasonably required to implement UCSF Health’s participation in the Joint Venture, including any subsequent agreements, modifications, or amendments thereto, provided that such agreements, modifications, amendments, or related documents are materially consistent with the terms above, and do not otherwise materially increase the obligations of the Regents or materially decrease the rights of the Regents.

BACKGROUND

Context, Purpose, Key Parties

In November 2014, the Regents approved an affiliation between UCSFH and JMH. UCSFH and JMH developed Canopy Health (an accountable care organization, or ACO) and BayHealth, LLC to enlarge and improve their joint network of care. In 2018, UCSFH established a primary care co-development plan with JMH and John Muir Physician Network.

In 2019, UCSFH and JMH pursued their fourth major initiative to establish a joint East Bay Cancer Network to provide high-quality, leading edge cancer care to patients in Northern Alameda County and Contra Costa County closer to their homes. As a part of this effort, UCSFH and JMH opened the first phase of a cancer program at the Berkeley Outpatient Center through various agreements between UCSFH and JMH and with BayHealth, LLC.

The second part of this plan is to create a flagship 124,000-square-foot cancer center on JMH’s campus in Walnut Creek that will become a destination program for patients in Contra Costa County and beyond. With this new cancer center, patients throughout Contra Costa County will be able to obtain comprehensive quality care for cancer in one location.

In addition, this project supports UCSFH’s cancer regionalization goal to improve the quality of cancer care across the Bay Area. UCSFH plans to create six to eight regional cancer centers in order to:

. Increase patient access to high-quality care and bring care closer to home for patients, . Improve patient outcomes and the coordination of care, . Improve patient experience (one place to receive all of their care, appointment availability, scheduling, parking, new and comfortable setting) and . Expand access to and participation in clinical trials, state-of-the-art treatments and procedures

UCSFH has built three regional cancer centers to date. The cancer center in Fremont, in collaboration with Washington Hospital, opened in 2017. UCSFH launched a second regional site in San Mateo in 2020. The third cancer center opened in 2020 in Berkeley in collaboration with John Muir Health as part of the UCSFH-JMH East Bay Cancer Network.

UCSFH selected JMH to partner in the development of a cancer network in the East Bay because JMH has a

HEALTH SERVICES COMMITTEE -4- H2A June 23, 2021

. common vision and values . commitment to improving quality and increasing access to all patients regardless of their ability to pay . long and consistent history of high patient satisfaction ratings . significant cancer services presence in Contra Costa County . strong history of successfully working with UCSFH

John Muir Health John Muir Health is a nationally recognized, not-for-profit health care organization with four hospitals with over 1,000 licensed beds and over 70 ambulatory sites. It is located east of San Francisco, serving patients in Contra Costa, eastern Alameda, and southern Solano Counties. The health system has been serving the community for over 90 years. The John Muir Walnut Creek Medical Center, the location of the planned UCSF-JMH Cancer Center Walnut Creek, was founded in the late 1950s by 50 physicians. After several years of fundraising, the physicians and community members purchased a site upon which to build the hospital. The hospital officially opened its doors on June 16, 1965.

JMH has roughly 30,000 inpatient discharges, 3,000 births, and 750,000 ambulatory visits annually. It includes a network of more than 1,000 primary care and specialty physicians, more than 6,000 employees, medical centers in Concord and Walnut Creek, including Contra Costa County’s only , and a Behavioral Health Center. JMH has partnerships with UCSF Health, Tenet Healthcare/San Ramon Regional Medical Center and Stanford Children’s Health. The health system offers a full range of medical services, including primary care, outpatient and imaging services, and is widely recognized as a leader in many specialties – neurosciences, orthopedic, cancer, cardiovascular, trauma, emergency, pediatrics, and high-risk care. JMH is the leading provider of health care services in Contra Costa County, serving 48 percent of the non-, adult market for inpatient services.

In the calendar year 2020, JMH reported over $2.1 billion in net revenue, EBIDA (Earnings Before Interest, Depreciation and Amortization) margin of 5.6 percent, and an operating margin of (0.7 percent). JMH has 358 days’ cash on hand, which improved during the challenging 2020 pandemic-dominated year. JMH has A1 (Moody’s) and A+ (S&P) bond ratings. Both ratings were affirmed with a stable outlook within the last nine months. JMH’s payor mix in 2020 was 50 percent Medicare, 30 percent Commercial, and 20 percent MediCal/Other. The health system engages over 300,000 individuals each year, 125,000 of whom are covered by “Value-Based Care” contracts, in which JMH is paid for its services based on quality, cost, and customer service outcomes.

JMH received a Leapfrog Hospital Safety Grade of “A” the last three years. It is a CMS Five Star hospital with a CMS patient survey score of Three Stars. John Muir Health’s HCAHPS (Hospital Consumer Assessment of Healthcare Providers and Systems) likelihood to recommend is 92 percent for its ambulatory operations and 83 percent for its hospitals.

JMH has a strong commitment to the surrounding community and contributes annually toward community benefits directed toward their mission “to improve the health of the communities we serve with quality and compassion.” JMH’s community benefits programs are focused in three

HEALTH SERVICES COMMITTEE -5- H2A June 23, 2021

areas: improving access to care, behavioral and mental health services, and economic security (including housing, food, and community and family safety).

Strategic Context

Contra Costa County Contra Costa County is a large and growing market with a population breakdown of 58 percent minority groups (including 26 percent Hispanic/Latino, 18 percent Asian, and nine percent African American) and 42 percent Caucasian. It is an important market for UCSF Health as it represents the second largest patient base for UCSFH Health outside San Francisco.

Market Opportunity JMH cares for approximately 38 percent of non-Kaiser Permanente new cancer cases and UCSF Health cares for eight percent. The remaining 54 percent of cases are treated by independent oncology groups, Stanford Health Care and Sutter Health. Contra Costa County has a population of approximately 831,000 adults. In central Contra Costa County, new cancer case volume is expected to grow 19 percent over the next ten years, one of the fastest rates in the region.

Competitive Environment – Contra Costa County The market for cancer services in Contra Costa County is dynamic and highly competitive. Stanford acquired a regional oncology group in 2017 as part of its plan to expand its cancer center in Pleasanton and is continuing to build a robust cancer program throughout the region. Large, local, private physician groups continue to grow and create outpatient cancer centers of their own. In addition, Kaiser Permanente built a comprehensive cancer program in nearby Alameda County in Dublin.

Program Plan The construction of the UCSF-John Muir Health Cancer Center Walnut Creek is in process and will include: . 42 examination, consultation and procedure rooms o Medical oncology: 24 examination rooms, two procedure rooms, two consultation rooms o Multi-specialty: ten examination rooms, three procedure rooms, one consultation room . 58 infusion stations . three LINACs + 1 shelled LINAC, HDR, 12 examination rooms, one procedure room, one CT Sim . Advanced imaging (x-ray, US, PET/CT, MRI) . five blood draw stations in Oncology Lab + three port draw stations in Infusion . Pharmacy, clinical trials, and supportive services (including genetic counseling and symptom management services)

There is shelled space for . 24 examination rooms . two procedure rooms . six infusion chairs

HEALTH SERVICES COMMITTEE -6- H2A June 23, 2021

In addition, in August 2021, John Muir Health Physician Network expects to complete its acquisition of an independent group of 24 cancer physicians in Contra Costa County in order to help staff the new cancer center and its distributed network. The group includes medical oncologists, radiation oncologists, urologists, and general surgeons.

Capital Request and Expected Return on Investment UCSFH is requesting up to $40 million of capital over the next four years based on the schedule below plus contingency. The following is an expected schedule of expenditures for the UCSF/JMH Cancer Center:

Year 1 Year 2-4 Total Total investment $42.6m 26.7m 69.3m UCSF’s investment (up to 49%) $20.9m 13.1m 34.0m

Structure

The UCSF-John Muir Health Cancer Center Walnut Creek will be governed by the members through representatives they designate. Governance rights will be allocated consistent with ownership interests. The Operating Agreement for the Joint Venture, when executed, will include appropriate provisions relating to capital calls, supermajority approval rights, anti- dilution rights, restrictions on transfer of equity interests, right of first opportunity provisions, a process for resolving deadlocks, member reserve powers, and other items typically addressed in governing documents.

Executive Committee A joint Executive Committee will be established in order to . advise on strategic direction . provide guidance on key actions to achieve the vision . review and recommend strategic capital investments . set and monitor annual and multi-year performance objectives

The Executive Committee will meet every other month at the outset and no less than once per quarter.

The Executive Committee will consist of three members designated by UCSFH and three members designated by JMH (including at least one physician from each party), the Medical Director, and two to three voting physician members selected by JMH and UCSFH who practice as part of the John Muir Medical Group and/or are UCSFH faculty who are members of the UCSFH Helen Diller Family Cancer Center.

Strategic Considerations

John Muir Health and UCSF Health have a unique opportunity to transform cancer services and coordinated care in Contra Costa County. The key to success is committing to the long-term nature of a partnership focused on serving patients and improving care in the region and building upon the current key differentiators of the JMH and UCSFH cancer programs. This program

HEALTH SERVICES COMMITTEE -7- H2A June 23, 2021

positions UCSFH at the core of the region’s leading cancer network and advances JMH’s position as the cancer services leader in Contra Costa County.

A successful partnership will add new capabilities, such as UCSF Health’s advanced clinical pathways, and provide better access to expert care resulting in improved cancer outcomes, service, and value in more convenient locations. Furthermore, engaging community physicians will provide opportunities for them to further sub-specialize and participate in clinical research, and will create the ability for UCSF faculty to increase clinical trial enrollment and serve more patients.

Impact on Academic and Research Activities at UCSF

The UCSF-John Muir Health Cancer Center Walnut Creek can become a significant addition to a variety of UCSF clinical and research activities which would include outpatient clinics, surgeries, and clinical trials.

The commitment to high-quality care includes the delivery of UCSFH Cancer’s Q CARE package (Quality Communication, Access, Research and Education). The implementation of Q CARE will improve the quality of and access to care provided to patients in their local community. Highlights of the Q CARE package include:

. Quality. UCSF will provide an infrastructure for monitoring and improving high-quality care at the UCSF/JMH Cancer Center in Walnut Creek, including: . Measures of Quality . Reviewing Results . Acting on Results . Operational Consultation . Communication and Access. UCSF will develop a rapid access process for consultations and second opinions. UCSF may leverage the UCSF Access Center and technologies to enable seamless JMH access. . Research. UCSF will actively support the JMH-UCSF research pipeline in Walnut Creek. . Education. o UCSF Cancer Speaker Series. UCSF and JMH will develop and present up to nine (9) times per year on oncology-related topics. o Other Conferences. JMH Physicians Gain Access to Current UCSF Didactic Oncology Conferences o CME Conference. UCSF and JMH create a CME Conference for Community MDs o Tumor Board Programs. JMH physicians to attend and present at various UCSF tumor boards.

Financial Considerations

UCSFH proposes to invest up to $40 million over the first four years of the affiliation. The total cost to UCSFH and JMH together is $69.3 million, broken down as follows: . $47.8 million - medical equipment including three linear accelerators; PET/CT; and build-out, installation and construction costs for equipment

HEALTH SERVICES COMMITTEE -8- H2A June 23, 2021

. $2.5 million - IT investments . $3.8 million - inventory purchase . $1.8 million - furniture, fixtures and non-medical equipment . $3.9 million - other intangibles . $9.5 million - goodwill and growing concern, some of which relates to the physician group acquisition reviewed above

Funds for the above investments will be derived from UCSF Health System reserves and are accounted for in the Health System’s ten-year plan as “strategic investments,” which in total are expected to be $160 million.

The ten-year pro forma below estimates a positive EBIDA margin from the initial year. The fluctuation in EBIDA is representative of the differing margins of each service and the volume mix of the services within a given year. Net present value at an eight percent discount rate is $23 million.

The capital assumptions were developed by the John Muir finance team with the assistance of fair market value consultant HMS Valuation Partners of Atlanta. The pro forma was also developed by the John Muir team, with input from the UCSFH finance team, based on their current experience for billing and collections, their market-based assumptions and capacity considerations for volume, and their expense experience for similar services. The UCSFH team reviewed UCSF average revenue and cost assumptions for similar services as a point of reference for the pro forma.

Staffing

The Joint Venture is not expected to have any material impact on existing UCSFH staff. To the contrary, the Joint Venture will be managing a new cancer center and is expected to delegate substantial operational responsibilities to its members, consistent with the members’ expressed desire to preserve their independent missions and identities while collectively serving their local communities by delivering well-integrated, high-quality, cost-effective clinical care. The Cancer

HEALTH SERVICES COMMITTEE -9- H2A June 23, 2021

Center will be operated on John Muir Health property as a clinic operated by John Muir Physician Network under its exemption from clinic licensure under California law, and/or under John Muir Walnut Creek Medical Center’s general acute care hospital license. The Cancer Center will therefore largely use John Muir Health and John Muir Physician Network staff or contractors, which will include various “covered services” as defined by Regents Policy 5402, Policy Generally Prohibiting Contracting for Services, including cleaning, custodial, janitorial or housekeeping services; building maintenance; transportation services; security services; billing and coding services; sterile processing; nursing assistant services; and medical imaging or other medical technician services. It is UCSF’s understanding that JMH actively and deliberately pursues compensation equity between its unionized and non-unionized employees but does not currently offer wage and benefit parity with University employees. However, as noted above, the Cancer Center will not be operated on University property but in John Muir Health-licensed space or John Muir Physician Network clinic space. Moreover, the UCSF-John Muir Cancer Center Walnut Creek will be located more than 25 miles from the nearest UCSF medical center and approximately 17 miles from the nearest UC campus.

Other Key Terms and Considerations

UCSF expects that there will be significant interaction between John Muir Health-affiliated community physicians and the UCSF faculty, which will improve the quality of care in Contra Costa County. This includes joint participation in tumor boards, clinical trials, consultations, second opinions, and participation in UCSF conferences. Teaching of medical students and house staff will not occur at this site.

General Business and Operational Risks

The UCSF-John Muir Cancer Center Walnut Creek will continue to be subject to various risks and uncertainties, including the following:

. Declines or adverse changes in the rates, methods, or timing of third-party reimbursements, including government healthcare programs, for physicians’ professional and infusion services . Changes in the healthcare regulatory environment or other governmental laws and regulations affecting operations, or increases in the cost of compliance . Ability to comply with applicable licensure, certification, and accreditation standards . The growth or lack thereof in the market for cancer care and related services . Competition with other healthcare systems in the community for patients, physicians, strategic relationships, and commercial health plan contracts . Professional liability risks

UCSFH confronts and manages similar risks in connection with the current operation of its other existing businesses, facilities, and service lines. UCSFH plans to continue to invest the same level of risk management resources and expertise in the operations of the Walnut Creek Cancer Center as it currently does for other physician office and clinic locations.

HEALTH SERVICES COMMITTEE -10- H2A June 23, 2021

With post-pandemic construction supply chain disruptions increasing normal escalation rates, the project’s development timeline is subject to the risks of construction cost escalations and schedule delays. In addition to the typical project contingency expenses, UCSFH has mitigated the risks of cost escalations and schedule delays by including higher escalation expenses in the overall development budget.

Legal and Regulatory Considerations

The healthcare industry is complex and highly regulated. All of the definitive agreements will reflect a commitment on the part of both partners to effective and robust compliance programs, which may be operated directly by the new company, or with assistance from UCSF and JMH.

None of the contemplated transactions is subject to prior regulatory approval in and of itself. The Cancer Center will likely be operated as a clinic exempt from licensure by John Muir Physician Network, which is a medical foundation as defined under California Health and Safety Code Section 1206(l), and/or under John Muir Walnut Creek Medical Center’s general acute care hospital license. Certain aspects of the Cancer Center may require regulatory approvals from State agencies such as the California Department of Public Health and the California Board of Pharmacy, as well as some federal approvals (e.g., Medicare CLIA certificates for clinical laboratories).

UC Health Considerations

Growth of the Walnut Creek Cancer Center is specific to UCSF and does not affect the rights, obligations, or activities of any other UC medical centers or locations. There are no restrictive covenants contained in the transaction documents that would prevent UCSF from participating in any UC Health systemwide activity, program, or initiative.

Risks of the affiliation include financial risks to the University’s investment, as well as risks to the University’s brand and image. For the Joint Venture, financial risks will be limited to the actual investment made in the company, as approved by the Regents. UCSF will manage these risks through its designated representatives and through the rights UCSF will maintain to dilute its interest in the companies or exit the venture.

Adding in a fourth major site to the UCSF regional cancer network furthers the vision of the UC Cancer consortium to expand the UC cancer program reach throughout the State of California. Significant expansion is necessary to compete effectively today in the healthcare industry. Such expansion provides participants a base from which to pursue and achieve administrative and operational efficiencies, and also facilitates population health delivery, evidence-based practice, and improved outcomes at lower cost. The only viable alternative to the proposed transaction is to invest substantially more financial and intellectual capital into building new clinical infrastructure and recruiting new health professionals to the UCSF network. The cost alone of doing so is prohibitive, however; earlier efforts to purchase physician practices and acquire interests in hospitals and other facilities serving adult patients have failed because, in some cases, other competitors have substantially outbid UCSF and because, in others, an affiliation with a

HEALTH SERVICES COMMITTEE -11- H2A June 23, 2021 governmental academic organization that requires the loss of an individual’s or organization’s community identity and local control is unacceptable.